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FIN 571 Week 2 Wiley Plus Practice Quiz

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FIN 571 Week 2 Wiley Plus Practice Quiz

Question 1

Your answer is correct.

Which one of the following statements about trend analysis is NOT correct?

 

This benchmark is based on a firm’s historical performance.

 

The Standard Industrial Classification (SIC) System is used to identify benchmark firms.

 

It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.

 

All of these are true statements.

 

 

Question 2

Your answer is correct.

Coverage ratios: Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio?

Solution:Given, EBIT= $7,221,643

Interest Expense=$611,800

Depriciation= $1,434,500

Cash Coverage Ratio=Earnings Before Interest and Taxes + Non-Cash Expenses
Interest Expense

=$7,221,643+$1,434,500/$611,800

=14.16 times

 

14.15 times

 

None of these

 

15.42 times

 

18.34 times

 

 

 

Question 3

Your answer is correct.

Multiples analysis: Turner Corp. has debt of $230 million and generated a net income of $121 million in the last fiscal year. In attempting to determine the total value of the firm, an investor identified a similar firm in Jacobs, Inc., an all-equity firm. This firm had 150 million shares outstanding, a share price of $14.25, and net income of $182 million. What is the total value of Turner Corp.? Round to the nearest million dollars.

Solution: Given,Turner Corp has  Debt=$230 million

Net income= $121 million

Jacobs has Equity= 150 millionx$ 14.25

=$2134 million and

Net income= $182 million

So Ke=NI/ Value of equity=$182/$2134=8.53%[as it is all equity firm Ke=Ko]

Value of the firm= NOI/K0

We know,K0=Ke-(Ke-Kd)x B/S

Or,0.0853=0.0853-(0.0853-Kd)x$(230/$2134)

Or, 0.0853=0.0853-(0.0853-Kd)x0.11

Or,Kd=0.09 or 9%

So value of the firm=${121+(230×0.09)}/0.0853

=$1661 million

 

 

$1,715 million

 

$1,421 million

 

$1,651 million

 

$1,191 million

 

Question 4

Your answer is correct.

Coverage ratios, like times interest earned and cash coverage ratio, allow

 

a firm’s creditors to assess how well the firm will meet its short-term liabilities other than interest expense.

 

a firm’s creditors to assess how well the firm will meet its interest obligations.

 

a firm’s shareholders to assess how well the firm will meet its short-term liabilities.

 

a firm’s management to assess how well they meet short-term liabilities.

 

Question 5

Your answer is correct.

Peer group analysis can be performed by

 

a) management choosing a set of firms that are similar in size or sales, or who compete in the same market.

 

b) using the average ratios of this peer group, which would then be used as the benchmark.

 

c) identifying firms in the same industry that are grouped by size, sales, and product lines, in order to establish benchmark ratios.

 

d) Only a and b relate to peer group analysis.

 

 

Question 6

Your answer is correct.

Efficiency ratio: If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of receivables?

Solution: Given, Accounts  receivable turnover =3.9 times and net sales= $3,436,812

Level of receivables=Net sales/ Accounts receivable turnover

=$3,436,812/3.9

=$881,234

 

$881,234

 

$13,403,567

 

$81,234

 

$1,340,357